14 August 2009

Richard Tol on Mitigation, and Two Responses

Richard Tol has written the analysis paper (PDF) on reducing carbon dioxide emissions for the Copenhagen Consensus exercise on climate change. Here is his abstract:

The impact of climate change is rather uncertain. Available estimates suggest that the welfare loss induced by climate change in the year 2100 is in the same order as losing a few percent of income. That is, a century worth of climate change is about as bad as losing one or two years of economic growth. The impact of climate policy is better understood. A clever and gradual abatement policy can substantially reduce emissions (e.g., to stabilise greenhouse gas emissions at 650 and 550 ppm CO2eq) at an acceptable cost (1 or 2 years of growth out of 100, respectively). Very stringent targets (e.g., the 2ºC of the EU) may be very costly, however, or even infeasible. Suboptimal policy design would substantially add to the costs of emission abatement.

For the Copenhagen Consensus on Climate 2009, this paper considers five alternative policies for carbon dioxide emission reduction. The alternatives differ in scope and intensity only. All five alternatives implement a uniform carbon tax, as that is the cheapest way to reduce emissions. The first policy spends $2.5 trillion on emission reduction in the OECD before 2020. This is rather silly. The benefit-cost ratio is less than 1/100. The second policy spends $2.5 trillion across the world before 2020. This is less silly because non-OECD emission reduction is a lot cheaper, but the benefit-cost ratio is still only 1/100. The third policy continues the same intensity of climate policy between 2020 and 2100. Most negative impacts of climate change are avoided by this policy, but the costs are so large that the benefit-cost ratio is only 1/50. In the fourth policy, $2.5 trillion is invested in a trust fund to finance emission reduction over the century. The benefit-cost ratio is 1/4. In the fifth policy, the trust fund is twenty times as small. The benefit-cost ratio is 3/2. In this policy, a tax of $2/tC is imposed in 2010 on all emissions from all sources in all countries; the tax rises with the rate of discount.

As the analysis ignores uncertainty and equity, one may argue for a more stringent climate policy. However, the analysis also ignores suboptimal implementation, which argues for a more lenient climate policy.

Onno Kuik wrote one perspective (response, PDF), and here is the abstract:

This paper discusses the estimated benefit-cost ratios on mitigation as a solution to climate change. We are in agreement with most of what is written by Richard Tol on the state of the art of economic research into the impacts of climate change and climate change policies, but we highlight a complementary approach that is based on a direct elicitation of (revealed or stated) preferences for climate change. With respect to the reported benefit-cost rations, this paper argues that they are a bit low because, first, they do not reflect the substantial concerns about equity and uncertainty; and second, because a substantial part of the benefits (after the year 2100) is not accounted for.

Roberto Roson wrote the other response (PDF), and here is its abstract:

The purpose of this paper is to critically review Richard Tol’s Assessment Paper on Traditional Mitigation, prepared for the Copenhagen Consensus Centre.

The Assessment Paper is largely based on the FUND model and the results of a set of simulation exercises, where a number of policy options are explored and assessed. In this Perspective Paper, a series of limitations of the FUND model are pointed out, as well as some other points, which remain quite obscure and limit the interpretation of the results. However, when considering the simulation scenarios, it is possible to make some general remarks, which are confirmed by the model results and bring one to think that we could have got about the same findings with a different model. In other words, we can trust the results even if we do not (completely) trust the model. It is suggested that it is important to look beyond the simple assumptions used in a model like FUND, to consider more realistic settings, in which incentives may play a key role.